Updated August 2022. It has now been nearly 5 years for my experiment comparing a Fundrise Real Estate portfolio and the Vanguard Real Estate ETF. In Fundrise, we have a start-up with “crowdfunding” beginnings that offers users a share of a concentrated basket of properties actively chosen from the private market. In Vanguard, we have a one of the largest real estate ETFs in the world – users own a tiny passive slice of 170 public-traded REITs. I invested $1,000 into both in October 2017 and the plan is to let them run for at least 5 years.
Fundrise Starter Portfolio background. When I bought in, the Fundrise Starter Portfolio was a simple 50/50 mix of two eREITs: the Fundrise Income eREIT and the Fundrise Growth eREIT*. Since these are finite baskets of entire properties, over time they will close one fund and start another similar basket. What new investors are buying today will be different apartment complexes and office buildings than what I bought in 2017. Here is what I hold now:
Each private eREIT works within recent crowdfunding legislation that allows all investors to own a basket of individual real estate properties (not just accredited investors with high net worth). The minimum deposit is now just $10. You must buy shares directly from Fundrise, and there are only limited quarterly liquidity windows as this is meant to be a long-term investment. There are also additional options available with higher investments:
Vanguard REIT ETF background. The Vanguard REIT ETF (VNQ) is the ETF share class of a $70 billion index fund that invests in publicly-traded real estate investment trusts (REITs). You can purchase it via any brokerage account. You have the liquidity of being to sell on any day the stock market is open. A single share currently costs about $100, but many brokers offer fractional dollar-based trades if you want. All shareholders are holding the same ratio of (tens of?) thousands of office buildings, hotels, storage centers, nursing homes, shopping centers, apartment complexes, timber REITs, mortgage REITs, and so on. Here are the recent top 10 holdings:
Expenses. The Fundrise Starter Portfolio has an 0.85% annual asset management fee and a 0.15% annual investment advisory fee (1% “all-in” total). The Vanguard REIT ETF has an expense ratio of 0.12% on top, but each public REIT also has their own internal costs like employee salaries to manage their properties. In each case, investors are paying for real estate management, office space for those employees, etc. REITs may also use debt to increase their real estate exposure (leverage). Is the technology offered by Fundrise a more efficient way to invest in real estate?
Performance update. Based on an initial $1,000 investment in October 2017 and immediately reinvestment of all dividends, here are the monthly balances of my Fundrise portfolio vs. the Vanguard REIT ETF.
Commentary. The main issue with this comparison is that this chart uses two different types of NAVs (net asset values). Vanguard updates the NAV daily based on the combined agreement of millions of investors. Every trading day, there is a price where you can liquidate your VNQ shares. Meanwhile, Fundrise NAVs are only estimates as there is no daily market value available since they hold entire apartment complexes, office buildings, and so on (similar to your house, but with even fewer comps). Your liquidity from Fundrise is limited to quarterly windows that are not guaranteed.
This is not to say that the Fundrise NAV is not truthful, especially over longer periods, but it’s simply not going to move around as much as the VNQ NAV. If you own farmland, office building, or a 100-unit apartment complex, does anyone really know the value at any given moment?
This makes Fundrise similar to a rental property that looks more stable over time because you don’t get daily price quotes on your rental property. You’re really just guessing until something actually sells. Meanwhile, that physical piece of property is something you can visit and see people using (and paying rent). For example, I own part of the The Ridley Apartments in Jacksonville, Florida (picture below). Here is a recent Bloomberg article about a Fundrise property in Los Angeles. That feeling of stability and tangibility is a “pro” of private real estate. However, the “pro” of REITs is exposure to investment growth with zero ongoing management concerns. Fundrise tries to give you a bit of both – you get pictures and updates from the properties but zero management responsibility.
However, this also means that I am not convinced that the performance of Fundrise is that much better than the Vanguard REIT after the effect of the bear market of early 2022. Right now, based on report NAVs, Fundrise is up +86% since October 2017 while the Vanguard REIT ETF is only up +32% as of June 30, 2022. That’s a big difference! I feel that if Fundrise really had to liquidate its real estate portfolio, the true net values would be much closer. Therefore, I’m going to keep the experiment going to see how it works out.
Bottom line. I’m nearly 5 years into my buy-and-hold-and-watch experiment where I compare investing in real estate via Fundrise direct active investment and the passive REIT index ETF from Vanguard. Right now, based on report NAVs, Fundrise is up +86% since October 2017 while the Vanguard REIT ETF is only up +32% as of June 30, 2022. However, due to the limited liquidity of Fundrise REITs and the current bear market, I wish to see how things work out after another year or more.
You can learn more about all Fundrise Real Estate options here. Anyone can invest with Fundrise; you don’t need to be an accredited investor.
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